M/S. Mall Of Joy Pvt Limited vs Union Of India on 4 June, 2024

1. Outcome

The Kerala High Court upheld the constitutional validity of Sections 16(2)(c) and 16(4) of the Central Goods and Services Tax Act (CGST Act) and State Goods and Services Tax Act (SGST Act), 2017.

However, the Court granted the following reliefs to the petitioners:
* Liberty to claim benefit of Circulars: Petitioners who are eligible for benefits under Circular No. 183/15/2022-GST dated 27.12.2022 and Circular No. 193/05/2023-GST dated 17.07.2023 (addressing initial GST implementation difficulties, particularly where GSTR-2A was not initially available or there were mismatches) are granted one month to approach the appropriate GST authority to process their claims.
* Retrospective effect to Section 16(4) amendment: The amendment to Section 16(4) (by Section 100 of Finance Act, 2022), which extended the time limit for furnishing the return for the month of September to the 30th day of November, shall be applied retrospectively from 01.07.2017. This means that if petitioners filed their returns for the month of September on or before the 30th November (even if after the earlier 20th October/30th September deadline), their Input Tax Credit (ITC) claims should be processed if they are otherwise eligible.

2. Core Issue

The core issue was the constitutional validity of:
* Section 16(2)(c) of the CGST/SGST Act, 2017: Which denies Input Tax Credit (ITC) to a registered person if the tax charged in respect of the supply has not been actually paid to the Government by the supplier.
* Section 16(4) of the CGST/SGST Act, 2017: Which imposes a time limit for a registered person to take ITC in respect of an invoice or debit note.

The petitioners argued these provisions violate Articles 14, 19(1)(g), and 300A of the Constitution of India.

3. Key Facts

• GST Introduction: The Goods and Services Tax (GST) regime was implemented in India on 01.07.2017, aiming for "One India, One market and One tax," a destination-based consumption tax with ITC to eliminate cascading effects.
• ITC Mechanism: The GST framework relies on a continuous chain of ITC, where tax paid on inputs at each stage is set off against output tax liability. This system involves self-assessment and the electronic filing of returns (GSTR-1 by supplier, GSTR-3B by recipient, with GSTR-2A/2B providing auto-populated data for verification).
• Conditions for ITC: Section 16(2) of the CGST Act specifies four cumulative conditions for availing ITC: possession of a tax invoice, receipt of goods/services, actual payment of tax to the Government by the supplier, and furnishing of the return.
• Petitioners' Grievances: Registered dealers (petitioners) were denied ITC despite having valid tax invoices, proof of payment to suppliers, and actual receipt of goods/services. This denial arose because:
  • Suppliers had remitted tax but it wasn't reflected in their GSTR-2A due to technical reasons.
  • Suppliers had collected GST from the petitioners but failed to remit it to the Government.
• Statutory Amendments & Circulars:
  • Section 16(2)(aa) was introduced (effective 01.01.2022) for matching invoices.
  • Section 38 was substituted (effective 01.10.2022) for auto-generated GSTR-2B.
  • Section 41 (regarding provisional credit and reversal) was substituted.
  • Section 16(4) was amended by the Finance Act, 2022, changing the deadline for claiming ITC from the due date of September's return to November 30th of the succeeding financial year.
  • CBIC issued Circular Nos. 183/15/2022-GST and 193/05/2023-GST to address bona fide ITC claims and mismatches during the initial period of GST implementation (prior to 01.01.2022).

4. Arguments

• Taxpayer (Petitioners):
  • Constitutional Infringement: Sections 16(2)(c) and 16(4) are arbitrary, unreasonable, and violate Articles 14 (equality), 19(1)(g) (freedom of trade), and 300A (right to property).
  • Section 16(2)(c): Denying ITC due to supplier's default is impossible for the recipient to ensure ("lex non cogit ad impossibilia"), shifts the State's burden of tax collection, leads to unjust enrichment for the Government (collecting tax twice), and unfairly treats bona fide purchasers like fraudulent ones. They argued ITC is a fundamental right under Section 16(1), not a mere concession.
  • GSTR-2A/2B: These are merely facilitative documents, and discrepancies should not override a taxpayer's actual entitlement to ITC based on valid documents and payment.
  • Section 16(4): This is a procedural provision that cannot defeat the substantive right to ITC. Late filing with fees should regularize the return. The initial deadline was unrealistic given GST complexities and technical glitches. The amendment to 30th November should apply retrospectively.
• Revenue (Respondents):
  • ITC as Concession: ITC is a statutory concession or entitlement, not an absolute right, and is subject to conditions and restrictions laid down by the law.
  • Fiscal Prudence & GST Structure: The conditions in Section 16 are crucial for maintaining the integrity of the GST system, ensuring tax collection, and facilitating the transfer of ITC in inter-state supplies (via Section 53's IGST mechanism). Without Section 16(2)(c), the originating state would incur significant revenue loss if it had to transfer amounts it never received.
  • Budgetary Impact: Indefinite allowance of ITC or claims without actual tax payment would destabilize annual revenue collection and budgetary allocations.
  • Self-Policing Mechanism: Section 16 fosters a self-monitoring system, incentivizing registered persons to ensure their suppliers comply with tax payments.
  • No Constitutional Violation: The conditions and time limits apply uniformly to all registered persons, thus not violating Article 14. Any perceived discrimination due to individual circumstances is incidental. The burden of proof for claiming ITC (Section 155) rests on the claimant.

5. Court’s Reasoning

• Nature of Taxing Statutes: The Court reiterated that taxing statutes are valid if within legislative competence (Article 246A), for a public purpose, and do not violate fundamental rights. However, the legislature has wide discretion in fiscal matters.
• Nature of ITC: The Court held that ITC is unequivocally a concession or entitlement granted by the statute, not an absolute or fundamental right. This entitlement is strictly subject to the conditions and restrictions prescribed in the Act, including those in Section 16(2) to 16(4).
• Validity of Section 16(2)(c):
  • The Court found Section 16(2)(c) vital for the operational efficacy of the GST framework, especially for inter-state supplies and the IGST mechanism (Section 53). If ITC were allowed without the supplier actually remitting tax, the originating state would suffer immense revenue losses by transferring funds it never received.
  • This condition is a reasonable mechanism to ensure the tax chain remains unbroken and tax is actually collected by the government. The argument of impossibility was rejected, stating that the taxpayer has recourse against the defaulting supplier.
• Validity of Section 16(4):
  • The Court emphasized that Section 16(2) (with its non-obstante clause and negative phrasing) and Section 16(4) are distinct but complementary restrictions on the eligibility and timing of availing ITC under Section 16(1). They are not contradictory, and one does not override the other.
  • Time limits for claiming ITC are essential for sound financial administration, budgetary planning, and avoiding indefinite claims that could cripple revenue collection. This principle has been upheld in previous tax regimes (e.g., CENVAT, VAT).
  • The Court relied on precedents from other High Courts (Andhra Pradesh and Patna) that had similarly upheld the constitutional validity of Section 16(4), affirming that ITC is not an absolute legal right.
  • The argument of Article 14 violation was rejected because the time limit applies universally to all registered persons, and any hardship arising from individual circumstances is an incidental effect of line-drawing in legislation.
• Practical Relief (Acknowledging Initial Difficulties): While upholding the provisions, the Court recognized the genuine difficulties faced by taxpayers during the initial years of GST due to systemic issues (e.g., GSTR-2A not being fully functional) and directed that:
  • Claims falling under the two specified CBIC Circulars (183/2022 and 193/2023) should be processed by authorities upon application within one month.
  • The amendment to Section 16(4) extending the September return deadline to November 30th should apply retrospectively from 01.07.2017, considering it a procedural relaxation.

6. Statutory References

• Constitution of India: Articles 14, 19(1)(g), 300A, 246A, 246, 254, 279A(5), 265, 31(1), 13, 302.
• Central Goods and Services Tax Act, 2017 (CGST Act) / State Goods and Services Tax Act, 2017 (SGST Act): Sections 16 (specifically 16(1), 16(2)(a), (aa), (b), (ba), (c), (d), 16(3), 16(4)), 31, 34, 37, 38, 39, 41, 43, 43A, 44, 47, 49 (specifically 49(2), 49(4), 49(5)), 50, 53, 54 (specifically 54(3), Explanation I), 59, 73, 74, 155.
• Central Goods and Services Tax Rules, 2017: Rules 36, 59, 60(7), 61.
• Integrated Goods and Services Tax Act (IGST Act)
• Finance Act, 2022: Section 100.
• Other Acts/Rules (cited in precedents): Income Tax Act, 1961, Customs Act, 1962, Bombay Sales Tax Rules 1959, Central Sales Tax (Karnataka) Rules, 1957, Central Sales Tax Act 1956, Tamil Nadu Value Added Tax Act 2006, Maharashtra Value Added Tax Act, 2002, Cenvat Credit Rules, 2004, Madhya Pradesh General Sales Tax Act, 1958.

7. Precedents Cited

• Godrej & Boyce Mfg. Co.(P) Ltd. & others v. CST & others [(1992) 3 SCC 624]
• Mahalaxmi Cotton Ginning Pressing & Oil Industries v. State of Maharashtra [2012 SCC OnLine Bom 733]
• Union of India & others v. VKC Footsteps (India) (P) Ltd. [(2022) 2 SCC 603]
• Astha Enterprises v. The State of Bihar [CWC No. 10395 of 2023] (Patna High Court)
• State of Karnataka v. Ecom Gill Coffee Trading (P) Ltd. [2023 SCC OnLine SC 248]
• Nahasshukoor v. Assistant Commissioner [WA. No.1853 of 2023:2023: KER: 69725] (Kerala High Court)
• State of Himachal Pradesh v. Goel Bus Service [2023 SCC OnLine SC 46]
• Sharaya Bano & others v. Union of India [(2017) 9 SCC 1]
• Gobinda Construction & others v. Union of India & others [CWC No. 9108 of 2021] (Patna High Court)
• Thirumalakonda Plywoods v. Assistant Commissioner of State tax [2023 SCC OnLine AP 1476] (Andhra Pradesh High Court)
• Khandige Sham Bhat v. AITO [AIR 1963 SC 591]
• State of Bihar and others v. Bihar Pensioners Samaj [(2006) 5 SCC 65]
• Vivian Joseph Ferreira v. Municipal Corporation of Greater Bombay [AIR 1972 SC 845]
• Raja Jagannath v. U. P. [1963 (1) SCR 220: AIR 1962 SC 1563]
• East India Tobacco Co. v. Andhra Pradesh [1963 (1) SCR 404: AIR 1962 SC 1733]
• State of Andhra Pradesh v. Nalla Raja Reddy [1967 (3) SCR 28: AIR 1967 SC 1458]
• Ravi Varma v. Union of India [1969 (3) SCR 827: AIR 1969 SC 1094]
• Twyford Tea Co. Ltd. v. State of Kerala [1970 (3) SCR 383: AIR 1970 SC 1133]
• State of West Bengal v. Kesoram Industries Limited & others [(2000) 1 SCC 710]
• Yadlapati Venkateswarlu v. State of Andhra Pradesh & another [1992 Supp (1) SCC 74]
• Smt Ujjam Bai v. State of Uttar Pradesh [1962 AIR 1621]
• State of Karnataka v. M/s. M K Agro Tech Private Limited [(2017) 16 SCC 210]
• India Agencies (Regd.) v. Additional Commissioner of Commercial Taxes [(2005) 2 SCC 129]
• Jayam & Co. v. Assistant Commissioner & Another [(2016) 15 SCC 125]
• ALD Automotive (P) Limited v. Commercial Tax Officer [(2019) 13 SCC 225]
• Reserve Bank of India v. Peerless General Finance and Investments Co. Ltd & Others [(1987) 1 SCC 424]
• Willowood Chemicals v. Union of India [2018 (58) GSTR 310 (Guj)]
• Union of India v. Bharti Airtel and others [(2022) 4 SCC 328]
• State of Madhya Pradesh v. Indore Iron and Steel Mills Pvt. Ltd. [MANU/SC/0637/1998: AIR 1998 SC 3050]